Analysts show signs of worry after Malaysia foreign reserves drop

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KUCHING: Analysts show signs of worry following Malaysia’s foreign reserves falling by RM8.2 billion to RM399.6 billion as of November 30.

RHB Research Institute Sdn Bhd (RHB Research) noted that this drop was mainly due to portfolio investment outflows and possibly Bank Negara Malaysia’s (BNM) recent move to stop ringgit transactions in the non-deliverable forward (NDF) market.

Despite this drop, the research house remained confidence that Malaysia’s current level of foreign exchange reserves is sufficient to finance 8.3 months of retain imports, which is an improvement from last year’s 7.4 month estimation.

“Similarly, the reserves covered 1.2 fold short-term external debt of the nation, which was slightly higher than 1 fold a year ago,” the research house said in a report on Thursday.

While the current foreign exchange reserves are adequate to meet with needs, this may not be the case in the long term as research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) believed foreign reserves will come under some pressure in December and the first quarter of 2017 (1Q17), with some potential risk of portfolio capital outflows.

“Market observers are concerned on capital outflows as the levels of foreign holdings in Malaysian Government Securities (MGS) remains high at 48.4 per cent as at endof November 2016, from 51.5 per cent as at end-October 2016.

“The foreign holdings of MGS fell by RM11.5 billion to RM173 billion as at end- November, whereas the total bond foreign holdings (including MGS) declined by RM19.9 billion to RM221 billion as at end November,” reported the research arm.

As the strength of the US dollar continues to grow, it may lead to an increased attraction for US dollar-denominated assets for foreign investors, which in turn will place selling pressure on foreign holdings of Malaysian bills and bonds as well as MGS.

“However, we believe that the sustainability of trade surplus, and hence current account surplus, will continue to support reserve level in the country, where we project reserves to be about US$94.5bn by end-2016,” opined the research arm.

Meanwhile, the amount of excess liquidity mopped up by BNM has seen an increase to RM6.6 billion as at November 30, from RM140 billion as at October 30.

RHB Research said that “This was reflected through the issuance of BNM bills to RM6.6 billion as at November 30, from RM5.7 billion as at October 30.

“Similarly, excess liquidity mopped up through repurchase agreements (repos) rose marginally to an estimate of RM5.7 billion at November 30, from RM5.6 billion as at October 30, while excess liquidity mopped up by the BNM through interbank borrowings, increased to an estimate of RM131.8 billion as at November 30, from RM128.8 billion as at October 30.”